Some thought the thunderous blast was a bomb; others never had time to find out. Just after 1 a.m. on Aug. 25, at least 42 people died after a gas leak exploded and sparked an inferno at Amuay, the world’s second-largest refinery.

It took three days to extinguish the blaze that ripped through the tangle of glittering smokestacks, tubes and tanks on Venezuela’s windswept Paraguana Peninsula.

The accident shines a harsh light on the troubles of oil monopoly PDVSA, which sits atop the largest oil reserves in the world. The suggestion PDVSA might be falling apart is particularly bad timing for socialist President Hugo Chavez. The 58-year-old, who says he has beaten cancer, is seeking re-election on Oct. 7.

Henrique Capriles Radonski, the challenger, has seized on the tragedy as further evidence of government mismanagement and incompetence. “The problem is that [the government] is only bothered with solving problems in other countries, it doesn’t care about what happens here,” he says.

Since Mr. Chavez, the self-crowned king of Latin America’s left, was first elected 14 years ago, the former tank commander has befriended assorted pariah states, such as Iran and Belarus. He has also sought to bolster the revolution closer to home by selling more than a third of oil exports at subsidized rates to like-minded regimes, especially Cuba.

All that has only been possible thanks to PDVSA, the world’s fourth-biggest oil company, according to a Petroleum Intelligence Weekly ranking. Since 1999, it has accumulated revenues of more than $1-trillion (U.S.), which the populist Mr Chavez has liberally tapped to finance his quixotic dreams.

At home, Mr. Chavez has used PDVSA as an all-purpose development agency to finance “21st-century Socialism.” Last year, PDVSA contributed $17.7-billion in taxes, royalties and dividends, while $30-billion went to social programs and obscure off-budget government funds.

PDVSA’s wealth has also been used to back multibillion-dollar loans from China and to buy arms from Russia. It supplies, almost single-handedly, Venezuela’s foreign exchange market. It is also a source of patronage: the number of employees, hired on the basis of their loyalty to the “Bolivarian Revolution,” has tripled since 2003 to more than 121,000.

“[The Amuay disaster] is not a random occurrence. It is the consequence of PDVSA’s transformation from an efficient and effective company into a profoundly politicized institution,” says Diego Gonzalez, president of the Caracas-based Centre for Energy Orientation. It is “a reflection of what is happening in the rest of the country.”

A decade ago, PDVSA was considered one of the best-run oil companies in the Americas. Today, inefficiency and incompetence have led to a string of accidents, causing 77 deaths before the Amuay explosion since 2003. The company’s annual report admits a lack of funds has hurt maintenance.

“The only maintenance they have done is to paint things red,” says Francisco Luna, a PDVSA union leader. “They make everything look nice and pretty but underneath it is all rusted. They don’t replace parts until they break,” he said, describing worker conditions as “disastrous.”

With fewer resources and attention dedicated to oil, it is no surprise that, according to BP, production has fallen from 3.1 million barrels per day to 2.7 million b/d in the past decade. Higher oil prices have masked that decline. When Mr. Chávez came to power, oil was less than $10 a barrel, now it is more than $100. Much of this windfall has also been spent on social projects, helping to reduce poverty from 44 per cent in 1998 to 27 per cent in 2011, according to government statistics.

But investment has been scrimped on, and the cost to PDVSA’s operational ability has been huge. Last year there was even a moment when markets feared for PDVSA’s solvency; its bonds still yield a hefty 11 per cent.

Indeed, Gustavo Coronel, a former board member, likens the company today to “a toothless tiger resting on its haunches before a huge slice of raw meat.” Venezuela might have the largest oil reserves in the world, some 300 billion barrels, according to BP’s statistical review. Yet these remain undeveloped because of “severe management, technical and financial constraints driven by the application of a rigid statist ideology for what should be a commercial enterprise.”

Fernando Travieso, who runs the Socialist Oil Observatory in Caracas, rubbishes such accusations. “The opposition says PDVSA is broke when it has reserves under the ground worth $30-trillion – that’s more than the GDP of the European Union,” he says, adding proven reserves have almost quadrupled under Mr. Chavez.

Whether or not Venezuelans worry that Mr. Chavez is killing the goose that lays the golden eggs will become evident in the October election. But his standing abroad is at rock bottom. Latinobarometro’s 2011 poll ranked Mr. Chavez as the second-least popular leader in the region after Cuba’s Fidel Castro.

It was not always like this. Everything began to change at PDVSA after Mr. Chavez’s opponents, having failed to remove him in a coup d’état that April, led an industry strike in December 2002. The strike lasted two months, crippling the economy. Afterwards, Mr. Chavez cleaned out PDVSA, sacking about 20,000 employees – many of them among its best technicians and managers.

“I sheathed my sword [after the coup] and I was wrong,” Mr. Chavez told a cheering crowd of supporters after the strike was broken.

This radicalization marked the birth of “the new PDVSA,” which Mr. Chavez says belongs to “all Venezuelans.” Indeed, PDVSA now engages in a multitude of activities which have nothing to do with oil, from managing a chain of state grocery stores and building houses to manufacturing sports shoes and running a school for Formula 1 racing car drivers.

Although Mr. Chavez first swept to power on a wave of national disgust with endemic corruption and clientelism, many believe the situation is now worse. The old economic elite has simply been replaced by the “bolibourgeoisie,” a term coined to describe a new breed of business magnates that emerged under Mr. Chavez.

Although Mr. Chavez has remained untarnished – his loyalists see him as innocent of the clientelism around him – he faced a particularly embarrassing incident in 2010 when the Aban Pearl offshore drilling rig sank just days after it was inaugurated. Mr. Coronel has shown that PDVSA was paying an intermediary $730,000 a day for the rig’s services, when they normally cost $358,000 a day. The intermediary turned out to be a shell company owned by Venezuelan businessmen identified by opponents as close to the government.

“No matter where you look you see evident signs of waste and corruption,” says Mr. Coronel, who believes that transparency and accountability are at all time lows in PDVSA’s “black box.”

For years, the legacy of past investments, rising oil prices and the sheer depth of Venezuela’s reserves have kept PDVSA afloat. This has enabled Venezuela to get financial help from abroad, including $32-billion of loans from China in return for secured future oil shipments, but has increased its debt tenfold. Critics argue PDVSA is simply mortgaging its future.

That future depends most on the upcoming elections. For now, most international oil companies – essential for the development of the oil-rich Orinoco Belt – have adopted a wait-and-see attitude. Although U.S. majors ExxonMobil and ConocoPhillips have already left, others argue that the worst is already over.

“We’ve lived with Chavez for so long that we know what we’re dealing with,” says one senior executive at a foreign oil company. “He would have nationalized us by now if he had wanted to.” Venezuela understands it needs foreign oil companies, says another. “That is our best insurance.”

If Mr. Capriles wins, he has promised to put an end to PDVSA’s “arbitrary and unclear use” of its revenues, sending “not a single drop more” to allies abroad. That could only be a good thing for the much needed investment in the industry, and thus Venezuela, oilmen say.

Should Mr. Capriles lose, though, Mr. Gonzlez, the oil analyst, fears that Venezuela could “miss the boat and turn into the largest energy theme park in the world.”

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